HMRC have an over-riding rule that most rewards, in whatever form, are deemed to arise from employment. The immediate consequence of this is that normally any associated tax liability is the responsibility of the direct employer. This includes anything that employees may receive from third parties, as happens when tour operators offer incentives to travel agents and their employees.

The problem

Very often these rewards are not correctly reported to HMRC. What and how these are reported depends on the nature of the reward and the underlying arrangement between travel agent and tour operator, and where there is confusion about such arrangements, this can lead to incorrect reporting. Almost inevitably this will be identified by HMRC leading to demands for back taxes, interest and penalties.

The complexity

The tax and national insurance treatment on such awards is anything but straight forward.

Where cash or ‘cash-exchangeable goods’ is provided by the tour operator, PAYE must be deducted when paid. Further Class 1 NIC is then also charged on both the value of the incentive and the amount of PAYE paid. This will potentially be the employing travel agent’s responsibility.

Alternatively where ‘non-cash goods’ are provided and where the tour operator arranges the incentive scheme, they must account for the tax due using the Taxed Award Scheme. They must also pay Class 1A NIC, again on the value of the award and the tax paid.

If the travel agent arranges the scheme, then the tour operator should still be responsible for the tax, but the travel agent will pay any Class 1A NIC.

The Tax

Stephen Rhodes, from Funway Holidays, stated that every £10 paid to an agent it costs the operator £4.23 in tax & NIC. How is this calculated?

For a basic rate taxpayer, roughly someone having total annual income under £42k, the appropriate tax rate is 20%. So if the net award is £10 then the tax on this is £10 * 100/80 i.e. £2.50, the gross award thus being £12.50.

There is then employers’ NIC, charged at a rate of 13.8%. However, this is applied to both the net award of £10 and the £2.5 tax the tour operator is meeting on behalf of the travel agent’s employee. Hence the total NIC payable is £1.73.

So on a £10 award the total payable becomes £2.50 tax and £1.73 NIC = £4.23.

Travel agents and their employees need to be aware, however, if the tour operator is only covering the basic rate tax, and an individual is a higher rate taxpayer, then there will be additional tax that needs to be paid.

The tour operator should provide the employee with a certificate of the arrangement where they are accounting for the tax to HMRC under what is called a Taxed Award Scheme.

Areas of Risk

The problem with incentive schemes is the complexity arising from uncertainty. Differing interpretations can lead to differing results. As we have now passed 5th April, employers need to ensure their 2014/15 end of year returns are properly completed, before HMRC come calling!

Things to watch out for:

Arrangement – who has actually arranged and facilitated the incentive. The tax responsibility normally lies with the initiator, but this may not always be easy to determine, especially as the tax legislation offers no help. If the travel agent has been actively involved, for example, having some sort of written arrangement with the tour operator, or taking part in distributing the vouchers to employees, then this may be sufficient for the travel agent to have the liability.

If, however, the travel agent is simply aware that such an arrangement exists, then the liability should rest with the tour operator.

Cash / non-cash – it is necessary to distinguish between cash and non-cash incentives, and then even with things like vouchers it needs to be distinguished between those that can be treated like cash and those that can simply be exchanged for good.

Where a voucher is exchangeable for cash, then it is the employing travel agent that is responsible for the tax and NIC even though this comes from the tour operator. This point is very often missed.

Unfortunately this is a complex area, despite being commonly used in the travel industry. So everyone involved needs clarity to ensure the tax and NIC is correctly accounted for – clarity in terms of what is being paid, who has arranged it and if it represents cash or non-cash items.